Circular Granting Forbearance to PFAs to Invest in Shares and other Securities of PFCs

The National Pension Commission (PENCOM) of Nigeria has issued a significant circular granting a 24-month regulatory forbearance to Pension Fund Administrators (PFAs), permitting them to invest in shares and other securities issued by the parent companies of their respective Pension Fund Custodians (PFCs). This temporary measure, effective from July 3, 2026, aims to address prevailing market realities, including operational constraints and a scarcity of quality domestic investable instruments, thereby expanding the investable universe for pension funds. The circular introduces stringent conditions, including eligibility criteria for parent companies, tiered investment limits across various pension fund categories, and enhanced governance and disclosure requirements, to mitigate potential conflicts of interest and concentration risks. This forbearance temporarily relaxes a key restriction under the Pension Reform Act 2014, seeking to enhance portfolio flexibility and optimize risk-adjusted returns for pension contributors.

The National Pension Commission (PENCOM) of Nigeria recently introduced a pivotal regulatory circular, dated July 3, 2026, extending a 24-month forbearance that permits Pension Fund Administrators (PFAs) to invest in shares and other securities issued by the parent companies of their Pension Fund Custodians (PFCs). This development marks a significant, albeit temporary, departure from existing investment restrictions within Nigeria's Contributory Pension Scheme (CPS). The circular is a direct response to prevailing market realities, including operational constraints and a perceived scarcity of high-quality domestic investment instruments, which have limited the diversification opportunities for pension funds.

This article delves into the specifics of PENCOM's forbearance circular, examining its provisions, the rationale behind its issuance, and its implications for practising attorneys and legal professionals in Nigeria's pensions sector. By analyzing the interplay between this new directive and the foundational Pension Reform Act 2014 (PRA 2014), we aim to provide a comprehensive understanding of the regulatory landscape and the critical considerations for PFAs, PFCs, and, ultimately, pension contributors.

Nigeria's pension system operates under the Contributory Pension Scheme (CPS), primarily governed by the Pension Reform Act 2014 (PRA 2014). This Act established a robust framework designed to ensure the safety and growth of pension assets. Central to this framework are two distinct entities: Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs). PFAs are licensed to manage and invest pension contributions, open Retirement Savings Accounts (RSAs), and facilitate the payment of retirement benefits. Conversely, PFCs are responsible for the safekeeping and custody of pension assets, receiving contributions, and settling transactions on behalf of PFAs, thereby ensuring a critical separation of duties to prevent mismanagement and fraud.

A cornerstone of the PRA 2014's protective measures is Section 88, which explicitly prohibits PFAs from investing pension funds or assets in shares or other securities issued by the PFA itself, its PFC, or a shareholder of either the PFA or its PFC. This restriction was designed to mitigate conflicts of interest and safeguard pension assets from related-party transactions that could compromise their integrity and the fiduciary duties owed to contributors. PFCs are typically subsidiaries wholly owned by licensed financial institutions, and their parent companies are required to guarantee the full value of pension assets held by the PFC. The current forbearance, therefore, represents a significant, albeit time-bound, relaxation of this fundamental safeguard, necessitated by evolving market conditions.

The PENCOM circular, signed by A.M. Saleem, Director of Surveillance, grants a 24-month regulatory forbearance, allowing PFAs to invest in a broader range of securities issued by the parent companies of their respective PFCs. This temporary relief directly addresses the limitations imposed by Section 88 of the PRA 2014, which previously restricted such investments. The primary objective articulated by PENCOM is to enhance portfolio flexibility, broaden the investable universe, improve diversification, and ultimately enable PFAs to achieve optimal risk-adjusted returns for pension contributors, particularly in light of a scarcity of quality domestic investment instruments.

To qualify for such investments, the circular stipulates stringent conditions for the parent companies of PFCs. They must be licensed financial institutions regulated by the Central Bank of Nigeria (CBN) and publicly listed on a securities exchange recognized by the Securities and Exchange Commission (SEC). Furthermore, these eligible firms must demonstrate robust financial health, a consistent track record of profitability and dividend payments, adherence to regulatory requirements, and the absence of any unresolved enforcement actions. These criteria are crucial for ensuring that pension funds are directed towards stable and reputable entities, even with the relaxation of related-party investment rules.

The forbearance also introduces specific, tiered investment limits to manage concentration risk across different pension fund categories. For equity investments in ordinary shares of a qualifying PFC parent, PFAs managing Funds I, II, VI-Active, and V-Growth are permitted to invest up to 3% of a fund's assets, while a more conservative limit of 1% applies to Funds III, IV, VI-Retiree, and V-Conservative. For corporate bonds issued by eligible parent companies, the caps are 5% for higher-risk funds and 3% for conservative and retiree-focused funds. Critically, the combined exposure of an RSA fund to both equities and bonds from a single PFC parent cannot exceed 5% of the fund's net asset value (NAV), with total exposure to all securities from that parent (including money market instruments) capped at 10% of the consolidated NAV. Additionally, limits are placed on lower-rated debt, allowing a maximum of 20% exposure to any “A”-rated bond issue and 15% to any “BBB”-rated issue from a PFC parent.

Beyond quantitative limits, PENCOM has mandated enhanced governance and disclosure requirements. PFAs are required to implement stringent internal controls, including independent review of proposed investments by their Investment Committee, Risk Management Unit, and Compliance Department, with final approval from the board. They must also maintain a dedicated “PFC-Party Conflict Register” and submit quarterly disclosures detailing their holdings in PFC parent companies, including acquisition dates, valuations, and exposure levels. Any breaches of investment limits or material financial distress at a parent company must be reported to PENCOM within 48 hours. These measures underscore PENCOM's intent to balance market development with robust contributor protection, ensuring that the temporary flexibility does not dilute fiduciary standards.

PENCOM's circular granting forbearance to PFAs to invest in securities of PFC parent companies represents a strategic, albeit temporary, recalibration of investment guidelines within Nigeria's pension industry. While designed to address market illiquidity and enhance investment opportunities for optimal returns, it introduces a nuanced layer of complexity regarding related-party transactions. The 24-month window provides PFAs with expanded avenues for diversification, potentially benefiting contributors through improved portfolio performance.

For legal practitioners, this circular necessitates a thorough understanding of the new eligibility criteria, the tiered investment limits, and the heightened governance and disclosure obligations. Advising PFAs will require meticulous attention to compliance, particularly in establishing and maintaining the PFC-Party Conflict Register and ensuring rigorous internal review processes. Lawyers must guide clients on navigating the fine line between leveraging new investment opportunities and strictly adhering to the stipulated safeguards, ensuring that all transactions are conducted on an arm's-length basis and in the best interest of pension contributors. The industry will keenly watch the impact of this forbearance and whether it achieves its stated objectives without compromising the fundamental principles of pension fund safety and integrity.